Darden Restaurants Activist Campaign Unusual: Expert

Darden Restaurants, Inc. (NYSE:DRI) shareholders are scheduled to vote tomorrow on whether to replace the company’s entire board of directors. So will Starboard Value get its way and have its full slate of directors elected, or will Darden win and keep control of its board?

It’s anyone’s guess, but one thing’s for sure. There are some developments in this activist campaign that make it a bit unusual, according to one expert.

Darden’s board must have really blown it

Chris Davis of Kleinberg Kaplan told ValueWalk in an interview that Starboard’s campaign against Darden Restaurants is unusual because the firm seeks to replace the full board. He notes that it’s not completely unprecedented, however.

“That doesn’t happen normally, and it requires extraordinary circumstances, and frankly, the way the Darden board has misplayed this raises it to an example of extraordinary circumstances,” Davis said.

He also said it’s unusual that the two biggest shareholder advisory firms, Institutional Shareholder Services and Glass Lewis, sided with Starboard in advising that shareholders vote to replace Darden Restaurants, Inc. (NYSE:DRI)’s entire board of directors.

“When they [ISS and Glass Lewis] support activists, they rarely support activists who are looking for more than a minority slate because they’re willing to support activism as an instrument of change, not as an instrument of board takeover,” Davis added. “I guess what you have to do is look and say, ISS and Glass Lewis must have really thought the existing board was beyond redemption.”

New activist trends

Darden is also an example of a broader trend within the restaurant industry. We’ve seen the recent activism against BJ’s Restaurants, Inc. (NASDAQ:BJRI) and Bob Evans Farms Inc (NASDAQ:BOBE), pointing to a string of campaigns against restaurant operators.

According to Davis, activist investors are apparently interested in the industry, and it’s likely that Darden Restaurants isn’t the last restaurant operator that will be targeted. In fact, many activist investors are probably considering whether the same technique that worked on Darden will work on other restaurant chains—assuming tomorrow’s vote brings with it a whole new slate of directors at Darden, as Starboard wants.

Darden should be a warning for other restaurants

Because of the upheaval at Darden Restaurants and also the string of campaigns against restaurant operators, Davis thinks other restaurant chains should beware.

“If you are the board of a publicly listed restaurant corporation, you should probably know that this is a good time to emphasize the good things you’re doing for shareholders and make sure you’re running the company as well as you can,” Davis said.

Activists gang up on companies

Another trend he noted was that now there seem to be more than one activist targeting companies, which he said is different than three or four years ago. He noted that Barrington Capital initially led the activism against Darden before Starboard stepped in.

“One activist pops up, and then you find out that other activists have been looking, and popping up as well,” Davis said. “And that’s a trend that says, lots of eyes are looking for the best targets using the same processes, the same analyses, the same thought processes, and they’re finding, not surprisingly, the same targets. It’s much more likely this year than in past years that when you’re on the verge of saying something, you find out that someone else has just said something.”